The total supply of homes for sale at this early juncture of 2017 coupled with the relative low affordability of those homes have made the market interesting to watch. The combination of broad personal financial situations is particularly pronounced among millennials celebrating their prime home-buying years. While some individuals may have a decent amount of money saved up for a home purchase, others have educational debt, lowering their maximum affordability price. Being aware of this situational variety will help both lenders and agents.

Right around the time when second-hand shops receive an influx of donated exercise equipment, we get our first glimpse of the year at our local housing market. Overall, it was a healthy and balanced start to the new year. New listings rose 3.1 percent to 4,304—the second strongest gain in nearly a year. Pending sales increased 4.3 percent compared to last January. Given the rush to lock in interest rates and close deals before the end of 2016, closed sales lagged slightly.

When it comes to inventory, the market is still feeling deprived. There were only 8,212 for-sale properties last month, 25.4 percent fewer than last January. That officially marks a 14-year record low for inventory. The median sales price increased 4.7 percent from last year to $225,000. Additional supply is a missing piece of this recovery and is critically needed. Competing bids on the most attractive properties are common in low inventory environments, and homes tend to sell quickly for close to or above list price. Average days on market until sale fell 7.1 percent to 79 days compared to 85 in January 2016. The average percent of original list price received at sale was 95.9 percent, 0.9 percent higher than last January. But the median days on market fell to 53 days and the median percent of current list price received increased to 98.9 percent. Given strong demand of late, the marketplace has only 1.6 months of supply—the lowest figure on record for any month since January 2003. This indicator measures the balance between supply and demand. Generally, five to six months of supply is considered a balanced market.

“Both buyers and sellers were feeling confident compared to January 2016,” said Cotty Lowry, Minneapolis Area Association of REALTORS® (MAAR) President. “It is obviously still early in the year, but that increase in new listings was the second strongest gain in about a year. If that is sustained, we should be able to achieve the balancing act of steady price gains while maintaining our affordability.”

Though single family sales dominate the Twin Cities market by number, townhome sales showed the largest year-over-year sales increase followed by condos. Similarly, though previously-owned properties make up the largest share of sales, new construction properties had a much larger year-over-year sales increase. The most active price range over the last 12 months is $190,000 to $250,000 but the largest gain in sales occurred in the $350,000 to $500,000 range.

A thriving local economy has been conducive to housing recovery. The most recent national unemployment rate is 4.7 percent, though it’s 3.6 percent locally. The Minneapolis–St. Paul metropolitan area has one of the lowest unemployment rates of any major metro area.

The average 30-year fixed mortgage rate stands at 4.17 percent, still well below a long-term average of about 8.0 percent. Marginally higher rates were widely expected in 2016, but the Federal Reserve waited until December. Expect about two minor increases in the federal funds rate in 2017—barring any unforeseen events. Job, wage and inventory growth are key to offsetting any declining affordability brought on by higher rates.

“The trick will be increasing supply enough to keep price growth at a moderate pace,” said Kath Hammerseng, MAAR President-Elect. “That will allow households to better absorb rising borrowing costs. Overall 2017 is expected to be another good year for housing.”

According to a recent Gallup poll, it is the first time in more than 15 years that a majority of Americans are optimistic about finding a quality job. This is great news for the entry-level housing market, as job growth and improved wages fuel demand for home purchases. Rents have also been on the rise, another factor that has put the entry-level market in strong demand.

While the winter months that lead us through the holiday season and to the end of December are typically a slower time for the housing market, the beginning of each new year tends to bring a renewed interest in moving or buying. The annual January resolution effect is in full swing so far in 2017. Prices are increasing, purchase agreements are being signed, and despite record inventory lows, demand remains strong.

The number of existing homes sold in 2016 was 5.4 million, which exceeded the 5.25 million sold in the previous year and is now the highest in a decade. Declining inventory and affordability are both going to be closely surveyed this year, as a continuation of those trends could negatively impact sales. For now, prices are still running higher and days on market are still lower, both indicative of healthy demand.

In winter, it is not uncommon for housing starts to tail off, but 2016 closed on an uptick and became the best year for housing starts since 2007. Granted, multifamily homes have been driving the increase in recent years, while single-family starts and building permits are mildly down. Yet there is warranted optimism for new single- family home building in 2017.

The big story of 2016 was twofold: the median sales price reached an all-time high; while closed sales reached an 11-year high. Closed sales nearly broke their all-time record, but fell 0.3 percent short of their all-time 2004 high. Seller activity declined 1.1 percent. Near-record sales activity combined with flat-to-weaker seller activity created a supply shortage. Active housing supply levels fell to a 14-year low. This shortage has created a competitive environment where multiple offers have become more common. Sellers are receiving strong offers in record time, but this fast-paced market can frustrate some consumers. Days on market fell to a 10-year low. Absorption rates fell to 1.6 months of supply at year-end, a record low. Foreclosure activity fell for a fifth straight year and is back below 2007 levels. Although single-family homes made up about 75.0 percent of all sales, both townhomes and condos showed a stronger increase in sales. Similarly, previously-owned homes made up about 93.0 percent of sales but new construction showed a much stronger increase.

2016 by the Numbers

Sellers listed 76,531 properties on the market, a 1.1 percent decrease from 2015Buyers closed on 59,988 homes, a 6.2 percent increase from 2015 and the highest figure since 2005Inventory levels for December fell 26.3 percent to 8,197 units compared to 11,125 in 2015—a 14-year lowMonths Supply of Inventory was down 30.4 percent to 1.6 months, also a 14-year low
The Median Sales Price rose 5.5 percent to $232,000, which is an all-time record high
Cumulative Days on Market declined 15.8 percent to 64 days, on average (median of 33)—a 10-year record lowChanges in sales activity varied dramatically by market segment

“The most important achievement of 2016 was erasing the losses in prices and equity caused by the downturn. As sales surpassed their 10-year high, Twin Citizens demonstrated that they are just as committed to homeownership as ever. There are some manageable challenges, but a favorable affordability picture, attractive rates, job growth and wage growth will continue to sustain a healthy real estate market,” said Cotty Lowry, President of the Minneapolis Area Association of REALTORS®.

“We reached some key milestones last year, and hope to continue with this momentum in 2017. It is a great time for those considering listing their home, as buyers are looking for more options. With median sales price at an all-time high, now is a great time to find out the current value of your home,” said Tina Angell, President of the St. Paul Area Association of REALTORS®. From The Skinny Blog.

If predictions hold true – a continuing inventory crunch, moderate price gains, higher mortgage rates – 2017 will likely be in favor of the seller. On the other end of the spectrum, deals may be harder to come by if the largest potential group of buyers, the millennials, do not start wading into the buying pool with more fervor.